Tax Incentives for IT and Game Development Businesses

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Feb 6, 2025
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Governments worldwide use tax incentives to attract IT and GameDev companies, easing corporate income tax burdens. From enhanced R&D deductions to deferred CIT and IP-box regimes, these incentives help businesses reduce costs and reinvest profits. Below, we explore key tax benefits and the jurisdictions offering them.

Tax Incentives for IT and Game Development Businesses

Governments worldwide employ tax incentives to attract innovative industries, including IT and Game Development. Among the various kinds of taxes, corporate income tax (CIT) often poses a significant financial burden. Unsurprisingly, many tax incentives are designed to reduce CIT, making certain jurisdictions more attractive to businesses.

Listed below are some of the most commonly implemented CIT-related incentives tailored to IT and GameDev companies.

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‍1. Tax Relief Through IP-Box Regimes

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Why Is This Advantageous?

‍Businesses can benefit from reduced CIT rates or a lower taxable base on profits derived from intellectual property (IP).‍

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Examples of Countries Offering This Regime: Cyprus, UAE, Kazakhstan

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‍Best For:
Companies involved in developing, licensing, or publishing software and games.

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‍How It Works:
IP-box regimes reduce taxes on profits generated from intellectual property.

  • In Kazakhstan, the taxable basis might be decreased by 100%. 
  • Cyprus allows an 80% reduction on the taxable amount.
  • The UAE offers a 0% CIT rate under certain conditions.

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Example:
A UAE-based company with an 80% nexus ratio and $1,000,000 in IP-derived profits would pay 0% tax on $800,000. The balance of the $200,000 will be taxed at the regular rate of 9%.

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‍Important Considerations:
Although beneficial, IP-box systems need accurate record-keeping and only apply to royalties or licensing income, not development services.Selecting the most suitable tax incentives depends on your company’s structure, activities, and goals. To ensure you maximize these opportunities, consulting a professional tax advisor is crucial. This will help tailor tax strategies to your business’s unique needs and future plans.

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‍3. Increased Deductions for R&D Costs

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Why Is This Advantageous?‍

Companies can deduct software development expenses at rates exceeding 100%, providing immediate financial relief instead of treating these costs as capital investments.

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Examples of Countries Offering This Incentive: Czech Republic, Denmark

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Who Stands to Benefit Most?
Firms with significant R&D expenditures, such as startups with high cash-burn rates, gain the greatest advantage.

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How It Works:
Businesses incurring R&D costs generally have two accounting options:

  • Deduct expenses immediately.
  • Capitalize the costs as intangible assets.

Yet, several countries allow deductions at enhanced rates, offering relief by effectively amplifying the deductible amount for tax purposes. For example, a firm generating $1,000,000 in revenue and incurring $300,000 in development costs generally deducts the full $300,000, resulting in $700,000 that is subject to corporate income tax (CIT). However, under enhanced deduction policies, such as those in the Czech Republic, these expenses may be deductible at a rate of 200%, which would lower the taxable income to $400,000.

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‍When Is This Beneficial?
This incentive is most advantageous for businesses with substantial R&D expenses, such as those employing large teams or managing complex projects. Companies expecting considerable development expenses may consider operating in states that provide this benefit.

‍Tip for startups from Hermes:

For unprofitable businesses with high R&D costs, carry-forward rules are crucial. For example, the Czech Republic allows unused deductions to be carried forward for three years, enabling startups to leverage benefits once they achieve profitability.

3. Deferred Corporate Income Tax

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Why Is This Advantageous?

‍CIT payments are deferred until profits are distributed as dividends, offering significant cash flow advantages.‍

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Countries Offering This Incentive: Estonia, Georgia

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‍Ideal For:

  • Holding companies
  • Venture capital funds investing in IT or GameDev
  • Operational cost departments handling non-R&D activities

How It Works: In traditional tax systems, CIT is paid annually on profits. In countries like Estonia and Georgia, however, businesses only pay CIT when earnings are delivered to shareholders.

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‍Example:
If a company earns $500,000 in profit, it can reinvest the entire amount without incurring immediate tax obligations. Taxes are only paid once dividends are distributed.

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‍Key Benefits:
This model encourages reinvestment by postponing tax payments, enabling businesses to fund expansion, acquire assets, or build portfolios without tax constraints.

Connected services

IP Box and tax incentives for digital businesses
Consulting on the business strategy
International tax consulting

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